How to Invest in Mutual Funds: Tips for Building a Balanced Portfolio

How to Invest in Mutual Funds: Step-by-Step Guide

As mentioned in the earlier section, mutual funds can cater to the needs of different investors based on their requirements. So, how do you invest in mutual funds? Rather than choosing schemes based on past performance and chasing returns, you should take a goal-based approach to investing in mutual funds.

1)    Identification of financial goals

You should work with an investment expert who can help you identify and list your financial goals. Goal-based investing is all about mapping your mutual fund schemes and other investments to your financial goals. It helps you keep your emotions aside during market up and down phases and stay focused on financial goals till they are achieved.

2)      Investing based on time horizon

Once you identify your financial goals, you should classify them based on the investment time horizon. They can be            classified as follows.

a)      Short-term financial goals

Financial goals for which the investment time horizon is up to three years may be classified as short-term financial

goals. Some of these include emergency fund, annual family vacation, etc. You may invest in debt funds for these goals.

These funds are less volatile and less risky but give low returns.

b)      Medium-term financial goals

Financial goals for which the investment time horizon is between three to seven years may be classified as medium-term financial goals. Some of these include buying a two or four-wheeler, house purchase down payment, etc.

You may invest in hybrid and/or multi-cap funds for these goals. These funds can provide exposure to multiple asset classes in a single scheme. They are relatively less volatile and risky than pure equity funds. However, the long-term return potential is lower than pure equity funds.

c)      Long-term financial goals

Financial goals for which the investment time horizon is more than seven years may be classified as long-term financial

goals. Some of these include a child’s higher education, retirement fund for self and spouse, home loan repayment, etc.

You may invest in equity funds for these goals. While these funds carry high risk, in the long run, the risk reduces. These funds have the potential to give inflation-beating high returns and create wealth for investors.

3)      Investing in mutual funds

Now that you have identified and mapped the mutual fund schemes to your financial goals, the next step is to start investing in them. If you are investing in mutual funds for the first time, you must complete the Know Your Customer (KYC) process. You have to submit your photograph, PAN, and Aadhaar copy. The KYC process can be completed either online or offline.

Once your KYC is complete, you can start investing in the mutual fund schemes identified in consultation with the investment expert. You can invest online or offline through the AMC website/branch or mutual fund distributor (MFD). You can invest a lumpsum amount or start a systematic investment plan (SIP).

For long-term investments, investing through the SIP route is recommended. You can make regular and disciplined investments for the long term. An SIP helps you navigate the market volatility and average your purchase price. In the long term, you will benefit from the power of compounding and create wealth to fulfil your financial goals.

Now that we have answered the question of ‘how do I invest in mutual funds’, let us look at the factors to consider before investing in mutual funds.

Factors to Consider Before Investing in Mutual Funds

Some factors to consider before investing in mutual funds include the following.

1)      Objective of the mutual fund

Check the objective of the mutual fund scheme and whether it aligns with your objectives and financial goals. If it aligns with your goals, you will be able to stay invested for the long term and achieve your goals.

2)      Type of mutual fund

There are various types of mutual funds based on the asset classes they invest in (equity, debt, hybrid, multi-asset, gold, etc.), diversification that they provide (broad market capitalisation based, sectoral, thematic, etc.), strategy (based on factors like momentum, alpha, quality, low volatility, etc.)

An investment expert can guide you on which mutual fund schemes you can invest in to build a balanced portfolio. For long-term financial goals, you can invest in diversified equity schemes, including large, mid, small, flexi, and multi-cap schemes. For diversification across asset classes, apart from major allocation to equity funds, you should have some allocation to debt schemes and gold fund of funds (FoFs).

3)      Investment time horizon

In the earlier section, we have discussed categorising your financial goals into short, medium, and long-term based on investment time horizon. Accordingly, choose the mutual fund schemes for investment based on time horizon.

4)      Expense ratio

The expense ratio is a small fee the mutual fund scheme charges to manage its expenses. When evaluating similar schemes with a comparable return potential, choose a scheme with a lower expense. The expense ratio directly eats into your returns. Hence, the lower the expense ratio, the better.

5)      Track record of the AMC

You should check the track record of the AMC before selecting it for investment. You should evaluate the AMC, its promoters, the track record of the fund manager, the assets under management, the consistency of returns, etc. An investment expert can help you with the AMC evaluation.

How to Monitor and Manage Your Mutual Fund Portfolio

You should work with an investment expert who can handhold you throughout your financial planning journey till your financial goals are achieved. They can review the portfolio performance regularly, once in six months or a year. During the review, they can evaluate whether the schemes are performing as expected. If some scheme is consistently performing below expected, they can suggest appropriate replacements.

Mutual funds: Your gateway to achieving financial goals

Mutual funds are one of the simplest and cost-effective financial products for achieving your financial goals. You can invest regularly in a disciplined manner through the SIP route. You can increase your monthly SIP amount on an annual basis with set-up SIP. A qualified and experienced fund manager does the job of managing your investments in the scheme. An investment expert can help you make a goal plan and invest in appropriate schemes to achieve them. Thus, mutual funds can be your gateway to achieving financial goals.

FAQs

Do mutual funds provide tax benefits?

If you are looking for income tax benefits at the time of investment, consider an equity linked savings scheme (ELSS). These schemes are eligible for a deduction from taxable income under Section 80C of the Income Tax Act. The maximum deduction allowed in a financial year is the amount invested or Rs. 1,50,000, whichever is lower.

ELSS has a lock-in of three years. In the case of SIP, every instalment will have a three-year lock-in from the investment date.

What are some of the common financial goals for which individuals invest in mutual funds?

Some of the common financial goals that most individuals have include the following.

• Child’s higher education and marriage
• Retirement fund for self and spouse
• Annual family vacation
• Buying a 2-wheeler or a car
• Accumulate money for house purchase down payment
• Home loan repayment
• Build a fund for starting your own business
• Building and maintaining an emergency fund, etc.